By Teresa Rivas

Incyte's quest for its next big thing ended in disappointment -- and a stock tumble -- this past week. Unfortunately, the problems go well beyond the recent selloff or the latest trial, as long-term investors in the biotech know all too well.

Incyte tumbled more than 8% earlier this week after disappointing Phase 3 study results for povorcitinib, a drug that targets severe hidradenitis suppurativa (HS). Strong Phase 2 data had lifted hopes for the treatment for the condition that causes chronic boils and abscesses under the skin, but the final results were less promising than the prior study in terms of efficacy and perceived competitive positioning.

That doesn't mean the drug won't get approved, but it likely means it won't be a blockbuster. RBC Capital Markets analyst Brian Abrahams warned after the results that sales will almost certainly miss the expected $1 billion mark. Another analyst, Truist Securities' Srikripa Devarakonda, noted that HS is a disease that tends to cause variable symptoms in people that respond differently to treatment. As a result, patients tend to try different medications to treat it, dimming its prospects. Povorcitinib is being tested as an anti-inflammatory for other uses, but Devarakonda warns that it will "take time for the full potential to be realized."

Povorcitinib is a JAK1 inhibitor, blocking a kind of enzyme called a protein kinase that regulates processes in the cell. That puts it apart from other anti-inflammatory biologics that instead target immune cell proteins called cytokines.

The latest trial data means that it's less likely that povorcitinib will take a bigger portion of the JAK market. And although the company has "other intriguing early programs" in its pipeline, Guggenheim's Michael Schmidt downgraded the stock to Neutral from Buy on the news, as he believes "the stock will be range-bound as investors continue to take a 'show me' approach" to the company's other up-and-coming drugs until there's more hard data.

At 10.5 times forward earnings, Incyte looks undeniably cheap compared with its five-year average of 30 times, especially for a stock that's expected to see earnings per share rebound strongly this year before climbing 15% in 2026.

The bigger problem for long-term investors is that those fundamentals have mattered little to Incyte in recent years, as has often been the case for biotechs. For an industry where the main question is always, "What's next?" it's often hard to find a satisfying answer. For Incyte, the fact that estimates have come down this past week -- and may continue to be revised lower -- only exacerbate the problem.

Over the past decade, when the S&P 500 index has risen 175%, Incyte has fallen by a third. The SPDR S&P Biotech and iShares Biotechnology exchange-traded funds have hardly kept pace with the broader market either, but at least both are in positive territory, up around 15% over the period. The same pattern plays out over the past three- and five-year periods too.

Even true blockbusters often don't translate into sustainable gains for biotechs. HIV and hepatitis C pioneer Gilead Sciences is one of the poster children for this: It too has badly lagged behind the broader market over the past five and 10 years.

In short, Incyte's problem isn't just related to the recent data, and it's not alone. Biotech's underperformance is a bitter pill to swallow, but it's not time to place big bets just yet.

Write to Teresa Rivas at teresa.rivas@barrons.com

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March 21, 2025 02:30 ET (06:30 GMT)

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